New type of ‘mega-fund’ pension scheme gets green light from government

But new model likely years away from becoming available to workers, warns former pensions minister Sir Steve Webb

A new type of occupational pension scheme which pools workers’ investments into one super-sized pot has been given the green light by the government.

Pensions minister Guy Opperman has announced that collective defined contribution (CDC) pensions will be brought forward.

CDC schemes pool savers’ investments to create mega-funds, which aim to meet the future pension payouts of scheme members by spreading the investment risk across a variety of opportunities.

The government is now consulting on how such schemes, which are used in the Netherlands, could work in Britain.

The consultation applies to England, Wales and Scotland. It is envisaged that Northern Ireland will make corresponding legislation.

Officials at the Department for Work and Pensions have been working with Royal Mail and the Communication Workers Union (CWU) to develop proposals for the introduction of CDCs.

Mr Opperman said: “Collective defined contribution pension schemes are an important innovation which will provide more choice and flexibility for pension scheme members and employers.”

The security provided by the large scale of CDC schemes could help to lead to more stable pension incomes.

As well as cutting administration costs, another potential benefit is that risks such as life expectancy and how long someone will need their pension for can potentially be pooled across a large group of thousands of pension savers.

The consultation will help to flesh out the details of exactly how such schemes could work and it is understood they will be brought in when parliamentary time allows following the consultation.

Currently, workers tend to have a defined benefit (DB) pension, which offers savers a guaranteed level of income when they retire such as a final salary pension – or, increasingly likely, a defined contribution (DC) pension, where the individual saver bears the risk of how much money they will eventually end up with in retirement and how well their investments perform.

DB pensions have become increasingly thin on the ground as people live for longer and firms find it difficult to meet their pension promises.

Sir Steve Webb, a former pensions minister who is now director of policy at Royal London, said new pension provision models which could help give greater certainty to workers about their future pensions would be welcome.

He continued: “But the fact that the government is only now launching a consultation which will run into 2019 means that we are probably many years away from such models becoming a reality on the ground.

“Appetite for such schemes is likely to come initially from employers still running defined benefit schemes and looking for a ‘half-way house’ solution if they are finding DB schemes too expensive. Relatively few employers any longer fit that description.”

PA